The CDS-Bond Basis

41 Pages Posted: 20 Mar 2012 Last revised: 21 Sep 2018

See all articles by Jennie Bai

Jennie Bai

Georgetown University - Department of Finance

Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; National Bureau of Economic Research (NBER)

Date Written: September 12, 2018


We investigate the cross-sectional variation in the CDS-bond basis, which measures the difference between credit default swap (CDS) spread and cash-bond implied credit spread. We test several explanations for the violation of the arbitrage relation between cash bond and CDS contract, which states that the basis should be zero in normal conditions. The evidence is consistent with `limits to arbitrage' theories in that deviations are larger for bonds with higher frictions as measured by trading liquidity, funding cost, counterparty risk, and collateral quality. Surprisingly however, we find that the basis is more negative when the bond lending fee is higher, suggesting that arbitrageurs are unwilling to engage in a negative basis trade when short interest on the bond is high.

Keywords: limit of arbitrage; basis; credit default swap; counterparty risk; liquidity

JEL Classification: G12

Suggested Citation

Bai, Jennie and Collin-Dufresne, Pierre, The CDS-Bond Basis (September 12, 2018). Georgetown McDonough School of Business Research Paper No. 2024531. Available at SSRN: or

Jennie Bai (Contact Author)

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States


Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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